It’s Taylor’s Birthday Corp. needed to borrow $200,000. The company issued a 20-year, 11% coupon annual...

It’s Taylor’s Birthday Corp. needed to borrow $200,000. The company issued a 20-year, 11% coupon annual payment bonds when market rates were 10.5% on January 1, 2015. One year later interest rates had increased to 8%. What is the issue price of the bonds? How much is it worth in 1 year?

Solutions

Expert Solution

Issue price

Price of a bond is the present value of its cash flows. The cash flows are the coupon payments and the face value receivable on maturity

Price of bond at issue is calculated using PV function in Excel :

rate = 10.5% (YTM of bonds = market interest rate)

nper = 20 (Years remaining until maturity with 1 coupon payment each year)

pmt = 200000 * 11% (annual coupon payment = face value * coupon rate)

fv = 200000 (face value receivable on maturity)

PV is calculated to be $208,230.91. This is the issue price.

Price after one year

Price of bond after one year is calculated using PV function in Excel :

rate = 8% (YTM of bonds = market interest rate)

nper = 19 (Years remaining until maturity with 1 coupon payment each year)

pmt = 200000 * 11% (annual coupon payment = face value * coupon rate)

fv = 200000 (face value receivable on maturity)

PV is calculated to be $257,621.60. This is the price after one year.

jeff jeffy answered 2 hours ago

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